Citigroup launches preferreds to help right ship; Pioneer on the way; UAL, Continental up on merger talk

By Evan Weinberger

New York, Jan. 15 - Citigroup launched $2 billion in perpetual non-cumulative convertible preferred stock on Tuesday after the market close to highlight a day where the New York-based bank's losses were the story.

In other new deals, Thornburg Mortgage Inc. priced a $156 million add-on to its existing 10% series F convertible redeemable preferred stock at $19.50 per share.

The Santa Fe, N.M.-based mortgage lender is adding 8 million shares to its existing preferred issue. There is a $22.23 million greenshoe on the addition, and Thornburg priced an offering of 7 million shares of common stock at $8.00. The common stock has a $7.98 million greenshoe.

The preferreds maintain their 3% initial conversion premium, $11.50 conversion price and 2.1739 conversion ratio.

The deal was upsized from an originally announced $112.5 million.

Pioneer Natural Resources Co., a Dallas-based oil and gas driller, was set to bring $400 million in convertible senior notes due Jan. 15, 2038 Wednesday after the market close.

Also launched Tuesday was Theravance Inc.'s $150 million in convertible senior notes due Jan. 15, 2015 after the market close.

The convertibles are talked at a 2.75% to 3.25% coupon and a 25% to 30% initial conversion premium.

There is a $22.5 million greenshoe.

The convertibles have call protection for the first four years and then are callable subject to a 130% hurdle for the last three years.

Theravance is a South San Francisco, Calif.-based biopharmaceutical company. The proceeds will go toward general corporate purposes, including drug research and development.

Secondary trading was light, market watchers told Prospect News, and most of it wasn't moving markets up. "In general buyers have dropped their bid levels some," a trader said.

Some highlights included sizable rises in Continental Airlines Inc. and UAL Corp. convertibles on the strength of airline consolidation talk.

Ocwen Financial Corp. convertibles moved up on news of a takeover offer led by the company's current CEO.

Kellwood Co. convertibles were higher on a coming fight over a hostile takeover bid.

Intel Corp. convertibles traded relatively flat leading up to its earnings report after the close. Investors hoped that Intel would at least meet expectations. Those hopes were not realized.

Citigroup's earnings and scramble for capital dropped financial convertibles. SLM Corp. and Washington Mutual Inc. preferreds were down. Countrywide Financial Corp. convertible debentures finished the day mixed.

Citigroup's $9.8 billion fourth-quarter loss and a Commerce Department report showing declining December retail sales set off a market stampede Tuesday.

The Dow Jones Industrial Average tumbled 277.04 points, or 2.17%, to close at 12,501.11.

The Nasdaq crumbled 60.71 points, or 2.45%, for a 2,417.59 close.

And the Standard & Poor's 500 handed back 35.30 points, or 2.49%, to close at 1,380.95.

Citigroup launches $2 billion convertible preferreds

Citigroup launched $2 billion in depository shares representing 0.001 shares of perpetual non-cumulative convertible preferred stock Tuesday after the market close. The depository shares are talked at a 6.5% to 6.75% dividend. The initial conversion premium is set at 24%.

Citigroup is the bookrunner of the Securities and Exchange Commission-registered transaction.

There is a $300 million over-allotment option.

The depository shares are set to price Thursday after the market close.

There is hard call protection through year five. After year five, the depository shares are callable subject to a 130% hurdle.

Prior to year 12, Citigroup can call the depository shares at 100% subject to a capital replacement covenant.

The liquidation preference on the depository shares is $50.

The depository shares carry dividend protection, with the adjustment based on Citigroup's 32-cent quarterly dividend threshold. There is takeover protection.

Citigroup also plans an undisclosed offering of straight, non-convertible preferreds.

The bank announced the private placement of $12.5 billion in 7% perpetual convertible preferred stock. The privately placed preferreds carry a 20% initial conversion premium. The Government of Singapore Investment Corp. bought $6.88 billion of the private placement. Other investors included the New Jersey Division of Investment, the Kuwait Investment Authority, former CEO Sanford Weil and Prince Alwaleed bin Talal of Saudi Arabia.

Citigroup also cut its dividend to 32 cents per share from 54 cents.

Citi CEO Vikram Pandit said the bank would sell some of its non-core assets, and there are rumors of massive job cuts in the coming months.

Much of Citi's $10 billion fourth-quarter loss was driven by an $18.1 billion write-down primarily in its mortgage portfolio.

"We are taking comprehensive action to position Citi for the future with the capital strength that will allow us to refocus on earnings and earnings growth," Pandit said in the statement. "In an uncertain environment, these actions put us on our 'front foot,' focused on capturing opportunities that earn attractive returns for our shareholders."

Citigroup stock (NYSE: C) fell $2.12, or 7.30%, to $26.94 on the day.

Financials dragged down

With the market reeling from Citigroup's announcement and waiting for Merrill Lynch's earnings report later in the week, financial convertibles were in general down on Tuesday.

Reston, Va.-based student loan giant SLM Corp., better known as Sallie Mae, watched its 7.25% series C mandatory convertible preferred stock due Dec. 15, 2010 close at 1,018.4 versus a closing stock price of $19.33 Tuesday. They closed Monday at 1,035.4 versus a stock price of $20.30.

Sallie Mae stock (NYSE: SLM) fell 97 cents, or 4.78%.

Seattle-based savings and loan Washington Mutual's 7.75% series R non-cumulative perpetual convertible preferred stock closed Tuesday at 883.265 versus a closing stock price of $13.59. They closed Monday at 913.95 versus a stock price of $14.32.

Washington Mutual stock (NYSE: WM) fell 73 cents, or 5.10%, on Tuesday.

And Calabasas, Calif.-based mortgage lender Countrywide's convertibles were mixed Tuesday.

Countrywide's Libor minus 350 basis point series A convertible senior debentures due April 15, 2037 closed Tuesday at 89 versus a closing stock price of $5.81. They closed Monday at 90.9 versus a stock price of $6.09.

Countrywide's Libor minus 225 bps series B convertible senior debentures due May 15, 2037 closed Tuesday at 89 versus a stock price of $5.81 after finishing Monday at 87.96 versus a stock price of $6.09.

Countrywide stock (NYSE: CFC) was down 28 cents, or 4.60%, on the day.

Pioneer coming to market

Pioneer Natural Resources' coming $400 million convertible senior notes due 2038 have been receiving mixed reviews.

The convertibles are talked at a 2.875% to 3.375% coupon and a 60% to 65% initial conversion premium. There are warrants covering 60% to 65% of the deal.

One buyside analyst said he modeled the convertibles out to 2% cheap using a credit spread of around 350 bps and volatility of around 28%.

"I think the hedgies are going to like it," an analyst said. "It's coming pretty cheap, and it's a solid BB+ credit."

He did say that there was a tough case to make for the stock's upside, adding that most of the reports he read had Pioneer's stock stuck in neutral.

A buyside outright fund manager was less charitable. He said the convertibles had a low beta and the "financing looks opportunistic."

Pioneer is using the convertible to pay down outstanding bank debt.

The convertibles are callable after five years, and there are puts on Jan. 15 in each of 2013, 2018, 2023, 2028 and 2033.

Pioneer stock (NYSE: PXD) fell $4.16, or 8.64%, to $44.00 on Tuesday.

Merger talk powers airlines

Dallas-based Delta Air Lines Inc. reportedly has entered into merger talks with both Northwest Airlines Corp. and UAL, the parent company for United Airlines.

Market watchers appear to be putting their money on the deal getting done with Minneapolis-based Northwest.

"If I had to bet, I would say Northwest," the analyst said. "If you're going to combine and take out capacity, that's one reason to merge. But it would seem to make more sense to build one bigger surviving network and crush the opponents."

The analyst said that the two companies' routes were more compatible with each other, allowing for increased flight coverage.

A second analyst said that the strengths of the two companies match up very well. Delta has few, if any, routes on the West Coast or in Asia, Northwest's major advantages. And Northwest has little, if any, East Coast exposure.

United has strong routes throughout the east and west and has good connections with other airlines, meaning there would be a lot of redundancy if Delta and United merged, the market watcher said.

"[Delta and Northwest] complement each other," he said. "On the surface, it seems like regulatory risk."

Plus, both analysts said, Atlanta-based United is coming out of financial trouble while Northwest was still struggling. Northwest needs a deal more, the analysts said.

Investors seemed to be putting more of their money on a Delta-Northwest deal than a deal with United.

Northwest stock (NYSE: NWA) rose $1.37, or 8.56%, to $17.38.

UAL stock (Nasdaq: UAUA) was up $1.64, or 4.98% on the day.

But UAL's 4.5% convertible senior limited-subordination notes due June 30, 2021 closed Tuesday at 124.015 versus a stock price of $34.57. They finished Monday at 119.50 versus a stock price of $32.93.

Houston-based Continental has not been mentioned in any of the merger talk. Its convertibles saw a steep rise Tuesday, however.

Continental's 5% convertible senior notes due June 15, 2023 closed Tuesday at 146.54 versus a closing stock price of $25.27. They closed Monday at 137.59 versus a stock price of $23.35.

Continental stock (NYSE: CAL) gained $1.92, or 8.22%, on the day.

Intel disappoints on earnings

Heading into what one analyst called a jittery earnings season, investors were waiting to hear what Santa Clara, Calif.-based Intel had to report for its fourth-quarter earnings.

Intel was set to announce after the close Tuesday.

"I would think if anyone can surprise to the upside, it'll be them," the analyst said of the semiconductor giant early in the afternoon.

Despite moving up 51% over the fourth quarter of 2006, Intel's earnings narrowly missed Wall Street expectations. And it gave a less-than-encouraging guidance for the coming year, adding grist to the economic slowdown mill.

Intel stock was getting hammered in after-hours trading.

"It's all about guidance," the analyst said.

Intel's 2.95% junior subordinated convertible notes due Dec. 15, 2035 traded in a narrow band Tuesday, closing the day at 101.512 versus a closing stock price of $22.69. They closed Monday at 101.362 versus a stock price of $23.08.

Intel stock (Nasdaq: INTC) slipped 39 cents, or 1.69%, on Tuesday. It was down more than 14% at around 7:30 p.m. ET in after-hours trading.

Ocwen up on privacy offer

William C. Erbey, chairman and CEO of West Palm Beach, Fla.-based Ocwen Financial, is leading a group of investors in an effort to take the business outsourcing firm private.

In a letter to the company's board of directors dated Jan. 14, Erbey offered $7 for each share of Ocwen common stock. Funds managed by Oaktree Capital Management LP and Angelo, Gordon & Co. LP are also a part of the bid.

"I would participate by making a significant investment in the transaction, and I expect that we would provide members of the company's senior management team with the opportunity to participate in the transaction as well," Erbey wrote, adding that he would remain CEO after the privatization.

In the letter, Erbey said that the financing will come from equity from the investment funds, Erbey and other members of senior management who are in on the deal. Erbey also proposed issuing up to $150 million in debt or other financing to repurchase some of Ocwen's outstanding debt.

If debt financing doesn't come through, Erbey said the Oaktree and Angelo, Gordon funds would be willing to fund any debt repurchases, adding that he expected Ocwen's debt burden to be lower if the deal is completed.

Erbey added that a special committee of Ocwen independent directors authorized to get outside legal and financial advice will receive a full merger proposal soon.

The committee has already retained Evercore Group for financial advice and Shearman & Sterling LP as its legal adviser and cautioned that it could not give any assurances that a deal would get done.

Ocwen's 3.25% convertible senior unsecured notes due Aug. 1, 2024 closed Tuesday at 90 versus a stock price of $6.09. They closed Monday at 72 versus a stock price of $3.98.

Ocwen stock (NYSE: OCN) surged on Erbey's proposal, gaining $2.11, or 53.02%.

Kellwood fight just beginning

On Tuesday morning, Sun Capital Securities Group, LLC announced that one of its affiliates had launched a hostile takeover bid of St. Louis-based clothing manufacturer Kellwood Co.

Cardinal Integrated, LLC is offering Kellwood stockholders $21 per share, valuing Kellwood at $762 million. The deal represents a 38% premium over Kellwood's closing stock price on Sept. 18, 2007, when the takeover bid was made to Kellwood's board of directors, and a 27% premium on Kellwood's close Monday, a statement from Sun Capital said.

Sun Capital owns 9.9% of Kellwood and intends to nominate its own slate of directors at the company's 2008 annual meeting.

A convertibles trader said that Kellwood is fighting back. "[Kellwood] has not simply rebuffed Sun Capital, but they've embarked on a buyback of their straight corporate debt," he said, adding that the company has authorized a $60 million bond tender offer. Sun Capital said it will lower its price to $19.50 per share if Kellwood doesn't rescind its bond tender offer.

The trader said that a takeover requires approval by 75% of the outstanding shares, so buying back 17% to 18% of them would make getting the supermajority that much harder. "They're playing hardball in a climate that's not the best for their business, retail," he said.

Kellwood's 3.5% convertible senior notes due June 15, 2034 closed Tuesday at 88.845 versus a closing stock price of $18.12. They closed Monday at 87.159 versus a stock price of $16.51.

Kellwood stock (NYSE: KWD) rose $1.61, or 9.75%, on word of the takeover attempt and the company fighting back.

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